Regional Rural Banks (RRB,SBI PO, IBPS PO Exam Oriented)
3.5. Regional Rural Banks
In spite of the rapid expansion program undertaken by the commercial banks in recent years, a large segment of the rural economy was still beyond the reach of the organized commercial banks. To fill this gap it was thought necessary to create a new agency which could combine the advantages of having adequate resources but operating relatively with a lower cost at the village level.
After the declaration of emergency, the then Prime Minister, Smt. Indira Gandhi, announced on July 1, 1975 the 20 point economic program of the Government of India. One of the points of this program was the liquidation of rural indebtedness by stages and provide institutional credit to farmers and artisans in rural areas. The Government of India promulgated on September 26, 1975, the Regional Rural Bank Ordinance, to set up regional rural banks throughout the country; the Ordinance was replaced by the Regional Rural Banks Act, 1976. The main objective of the regional rural banks is to provide credit and other facilities particularly to the small and marginal farmers, agricultural laborers, artisans and small entrepreneurs so as to develop agriculture, trade, commerce, industry and other productive activities in rural areas.
3.5.1. Objectives of Regional Rural Banks
The following are the main objectives of regional rural banks:
1.To provide credit and other facilities particularly to the small and marginal farmers, agricultural laborers, artisans, small entrepreneurs and other weaker sections.
2.To develop agriculture, trade, commerce, industry and other productive activities in the rural areas.
3. To provide easy, cheap and sufficient credit to the rural poor and backward classes and save them from the clutches of money lenders.
4. To encourage entrepreneurship.
5. To increase employment opportunities.
6. To reconcile rural business aims and social responsibilities.
3.5.2. Capital Structure
Regional Rural Banks were established under the provisions of an Ordinance passed on 26 September 1975 and the RRB Act. 1976 to provide sufficient banking and credit facility for agriculture and other rural sectors. These were set up on the recommendations of The Narasimham Working Group during the tenure of Indira Gandhi's government with a view to include rural areas into economic mainstream since that time about 70% of the Indian Population was of Rural Orientation. The development process of RRBs started on 2 October 1975 with the with forming the first RRB, the Prathama Bank. Also on 2 October 1976 five regional rural banks were set up on with a total authorised capital of Rs. 100 crore ($ 10 Million) which later augmented to 500 crore ($ 50 Million). There were five commercial banks, Punjab National Bank, State Bank of India, Syndicate Bank, United Bank of India and United Commercial Bank, which sponsored the regional rural banks. Earlier Reserve Bank of India had laid down ceilings on the rate of interest to be charged by these RRBs..
3.5.3. Features of Regional Rural Banks
The following are the features of the regional rural banks:
1. The regional rural bank, like a commercial bank, is a scheduled bank.
2. The RRB is a sponsored bank. It is sponsored by a scheduled commercial bank.
3. It is deemed to be co-operative society for the purposes of Income Tax Act, 1961.
4. The area of operations of the RRB is limited to a specified region relating to one or more districts in the concerned state.
5. The RRB charges interest rates as adopted by the co-operative societies in the state.
6. The interest paid by the RRB on its term deposits may be 1% or 2% more than that is paid by the commercial banks.
7. The regional rural bank enjoys many concessions and privileges.
3.5.4. Functions of Regional Rural Banks
The functions of Regional Rural Bank are as follows:
1. Granting of loans and advances to small and marginal farmers and agricultural labourers, either individually or in groups.
2. Granting of loans and advances to co-operative societies, agricultural processing societies and co-operative farming societies primarily for agricultural purposes or for agricultural operations and other related purposes.
3.Granting of loans and advances to artisans, small entrepreneurs and persons of small means engaged in trade, commerce and industry or other productive activities within a specified region.
4. Accepting various types of deposits.
The credit policy of regional rural banks is more liberal than co-operative banks. It is not necessary for the borrower to mortgage property or deposit title deeds. It is not necessary to produce �not encumbrance certificate� or get legal opinion.
3.5.5. Progress Achieved by Regional Rural Banks
The Regional Rural Banks have achieved significant progress in all directions. The progress achieved is discussed below:
1.Number of Banks: The first, five regional rural banks were started at Moradabad and Gorakhpur in Uttar Pradesh, Bhiwani in Haryana, Jaipur in Rajasthan and Malda in West Bengal. There are now (June 2001) 196 regional rural banks, covering over 400 districts in the country with 14,550 branches. The largest number of offices are started in Uttar Pradesh.
2. Deposits: The deposits of regional rural banks increased substantially over the years. The total deposits were only Rs. 20 lakhs in 1975. They increased to Rs. 25, 430 crores by June 2001.
3. Advances: Total advances granted by all regional banks amounted to Rs. 10 lakhs in 1975. The total advances granted increased to Rs. 11,020 crores in 2000. Over 90% of the advances of regional rural banks are direct advances to small and marginal farmer, landless laborers and rural artisans.
4. Self-employment Schemes: The regional rural banks are making notable effort to encourage self-employment schemes.
5. Creation of Local Employment Opportunities: Regional rural banks have been taking active steps to create employment for the local people and achieved good success.
6.Participation in Various Program: During the last 22 years regional rural banks have been active participants in program designed to provide credit assistance to weaker sections. For instance, they are providing credit assistance to identified beneficiaries under the New 20-Point Program for scheduled castes and tribes.
7.Assistance to Physically Handicapped Persons: Physically handicapped persons are provided finance for purchase of artificial limbs, hearing aids, wheel chairs etc.
8. Farmers Societies: Regional rural banks have also sponsored and financed about 90 farmers societies.
9.Integrated Rural Development Program (IRDP Scheme): Regional rural banks have been taking active part in the Integrated Rural Development Program.
Regional rural banks, thus, have achieved notable progress in expanding branch network and extending credit support to weaker sections in rural areas. They exist as rural banks of the rural people.
The following are the major problems faced by the regional rural banks:
1. Existence of Overdues: The most serious problem faced by the regional rural banks is the existence of heavy overdues. Overdues are rising continuously. It is estimated that about 30% of the loans sanctioned still remain due from the borrowers. This has caused innumerable financial problems besides limiting the capacity of regional rural banks to lend and operated as viable units.
2. Losses: Most of the regional rural banks are not economically viable. They have been continuously incurring losses for years together. The accumulated losses are estimated to be Rs. 1200 crores upto March 2000.
3. Limited Channels of Investment: Since the regional rural banks have to lend to small and marginal farmers and other weaker sections of the society, the channels of investment are limited. Therefore, their earning capacity is low.
4. Difficulties in Deposit Mobilization: Regional rural banks have been facing a number of practical difficulties in deposit mobilization. Richer sections of the village society show least interest in depositing their money in these banks because they are served by these banks.
5. Procedural Rigidities: Regional rural banks follow the procedures of the commercial banks in the matter of deposits and advancing loans. Such procedures are highly complicated and time-consuming from the villagers point of view.
6. Hasty Branch Expansion: There is haste and lack of coordination in branch expansion. It has resulted in lopsidedness in branch expansion. It has increased infrastructure costs and reduced profitability.
7. High Establishment Costs: The salary structure of regional rural banks has been revised with the result that establishment costs have gone up. The regional rural banks are unable to cover the increased costs, since their customers are specified weaker sections enjoying concessional interest on loans and advances. The surplus available for meeting interest on deposits, administration costs and other expenses is said to be very low.
8. Multi-agency System of Control: Regional rural banks are controlled by many agencies. The present multi-agency control of regional rural banks involves sponsor banks, NABARD, Reserve Bank, State Governments and the central government. This is not conducive to high operational efficiency and viability. So the present multi-agency system of control should be replaced by single agency control.
9. Slow Progress in Lending Activity: The growth in loan business of regional rural banks is low. For this the following reasons may be given:
(a) There has been limited scope for direct lending by regional rural banks in their fields of operation.
(b) It is always difficult to identify the potential small borrowers.
(c) Most of the small borrowers do not like the bank formalities and prefer to borrow from the money-lenders.
(d) There is lack of co-ordination between officials of district credit planning committees and the regional rural banks.
10. Inefficient Staff: As the salary structure of regional rural banks is not attractive when compared to other banks, efficient persons have a tendency to shift to commercial banks to improve their salary and career. Besides, many employees are not willing to work in villages. There is no true local involvement of the bank staff in the villages they serve.
Despite these problems, the regional rural banks have been trying their level best to achieve their social objectives. They have succeeded in projecting their image of �Small Man�s Bank.� They are in fact, development banks of the rural poor. They have been trying to fill regional and functional gaps in rural finance in our country.
3.5.7. Suggestions for Reorganizations and Improvement
Several expert groups have made a number of suggestions necessary to reorganise the structure and improve the working of regional rural banks. The important suggestions are given below:
1.These banks should continue to work as rural banks of the rural poor.
2.The state governments should also take keen interest in the growth of Regional Rural Banks.
3.Participation of local people in the equity share capital of the regional rural banks should be allowed and encouraged.
4.The regional rural banks should be linked with primary Agricultural co-operative societies and Farmer�s service societies.
5.The regional rural banks should be strongly linked with the sponsoring commercial banks and the Reserve Bank of India.
6.A uniform pattern of interest rate structure should be devised for the rural financial agencies.
7.The regional rural banks must strengthen effective credit administration by way of credit appraisal, monitoring the progress of loans and their efficient recovery.
8.The regional rural banks should increase their consumption loans to the villagers and weaker sections. They should be allowed to increase their loans to richer sections of the society.
9.The regional rural banks should be permitted to provide full range of banking services, such as, remittance and other agency services, which would help a lot in developing banking habits among the villagers.
10.The regional rural banks should diversify their loans.
11.The present multi-agency system of control of regional rural banks should be replaced by single agency control.
12.As far as possible, natives should be appointed to work in them. The employees should be given suitable training.
13.Effective steps should be taken to prevent the misuse of funds by borrowers and willful defaulters.
14.Lending procedures should be made easy in order to avoid undue delays.
15.The image of regional rural banks should be improved. They should not be identified as �Second class� banks or an extension of the urban-oriented commercial banks. They must develop their own identity.
Regional rural banks have an important role to play in our rural economy as they have to act as alternative agencies to provide institutional credit in rural areas. They have not been set up to replace co-operative credit societies but supplement them. What the commercial banks have not done in rural areas, regional rural banks are trying to do it now. A such, regional rural banks should be specially assisted to solve their problems and be made real promoters of growth in rural India.